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Eurozone economy to remain weak for now: ECB's Draghi

07 November 2012, 16:49 CET
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(FRANKFURT) - The economic situation in the 17-nation eurozone is weak and will remain so for the time being, European Central Bank President Mario Draghi warned on Wednesday.

"Unemployment is deplorably high. Overall economic activity is weak and it is expected to remain weak in the near term," Draghi told a banking conference here.

With growth of the money supply and credit to remain subdued, inflationary pressures in the single currency area were contained, the ECB chief said.

Turning to Germany, Europe's biggest economy, Draghi noted that it had so far been largely insulated from the difficulties faced elsewhere in the euro area.

"But the latest data suggest that these developments are now starting to affect the German economy" as well, Draghi said.

That assessment was backed up by a new report published earlier by a panel of the German government's top economic advisors, the so-called "Five Wise Men".

"Germany can no longer de-couple itself from its external economic environment," the panel said.

Unlike most of its European neighbours, Germany has weathered the worst of the long-running debt crisis thanks to deep and painful structural reforms implemented a number of years ago.

It clocked up growth of as much as 4.2 percent in 2010 and 3.0 percent in 2011.

But growth has been slowing this year. After expanding by 0.5 percent in the first quarter, the economy grew by 0.3 percent in the second quarter and growth looks set to slow again in the third quarter.

"Economic momentum in Germany is likely to reach bottom in the fourth quarter," the Five Wise Men wrote, confirming a previous forecast for overall gross domestic product (GDP) growth of 0.8 percent for the whole of 2012.

In their report, the experts said that it was largely the ECB's non-standard policy moves -- such as its unlimited provision of liquidity and its controversial bond purchase programmes -- which had helped stabilise the eurozone financial system throughout the crisis.

But the experts warned that such measures risked blurring the line between monetary and fiscal policy and should therefore be considered a stop-gap solution only.

The ECB's bond purchases in particular have come under fire, not least in Germany, for fuelling inflation and for covertly financing heavily-indebted governments.

Draghi rejected such charges.

"Our actions will not lead to disguised financing of governments," he insisted.

"Interventions will take place solely on the secondary market, where bonds already issued are traded. And since we will only purchase bonds with a remaining maturity of between one and three years, there will still be ample room for market discipline on governments at longer maturities," he said.

In addition, "our actions will not lead to inflation," the ECB chief insisted.

The weak overall economic situation, combined with slow money growth, meant that the risks of inflation were currently "very low over the medium term."

"Our interventions will not change this outlook. In fact, for every euro we inject with our interventions, we will withdraw a euro. So they will not affect monetary conditions," Draghi said.

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